LONDON—
Tesco
TSCDY 2.51%
PLC on Tuesday slashed its full-year profit forecast as the U.K. retailer continued to pay the price for recent accounting missteps and years of underinvestment in its home market.

Tesco, which vies with
Carrefour SA
for the title of world’s second-biggest retailer behind
Wal-Mart Stores Inc.,
said group trading profit for the year ending February wouldn’t exceed £1.4 billion ($2.19 billion). Analysts had previously forecast a figure of around £1.94 billion.

Related

The reduced forecast marks Tesco’s fourth profit warning in six months and sent the company’s shares plummeting in London trading. The shares touched a 15-year low of 155 pence but recovered to close down 6.7% at 174.9 pence, still near 10-year lows.

Tesco’s latest profit warning rocked the U.K. grocery sector. Shares in
J Sainsbury
PLC and Wm. Morrison Supermarkets PLC both fell more than 4% as analysts said profit margins at other supermarket operators would likely suffer as they compete with price cuts.

Tesco said it has in recent weeks implemented new policies and procedures—including the retraining of staff working in the finance department—to govern its commercial income to ensure revenue recognition is transparent and appropriate. Chief Executive
Dave Lewis
said he had led the training sessions himself but had brought in external advisers in an attempt to stamp out the accounting practices that led to the £263 million accounting overstatement.

Those accounting missteps involved overstating a profit forecast and resulted in the departure of several senior executives.

Commercial income refers to promotional money, discounts and rebates from suppliers. Tesco has admitted that in previous periods it recorded the commercial income on its books as revenue before recognizing the cost of paying for the goods from suppliers.

Mr. Lewis, who has worked at the company for less than four months, said in October he hoped to move on from the accounting scandal and focus on reviving the retailer’s flagging U.K. business. “We will draw a line under the accounting issue as of now,” he said at the time.

But since then, the U.K.’s Serious Fraud Office has said it would launch an investigation into Tesco’s accounting, raising the possibility of criminal convictions for individuals, or the entire company.

Tesco also said it had taken steps to improve the competitive position of its business, investing in adding more than 6,000 employees in U.K. stores, increasing product availability on key lines and reducing prices.

Market Talk

Tesco’s Warning Has Significant Sector Implications Tesco’s trading update that group full-year trading profit would not exceed £1.4 billion implies “very little if any 2H U.K. trading profit,” says Mike Dennis at Cantor Fitzgerald, and the implications for the sector are significant. “We could now expect little if any U.K. sector trading margin and, a significant further reduction in J. Sainsbury, Wm Morrison and Asda’s trading margins, as they all move to ‘lower cost to operate models’ on lower base pricing with more write downs of existing store assets.” Tesco drops 13% at 163.3p, J Sainsbury drops 5.2% at 223.6p and Wm Morrison down 5.5% at 174.7p. (nick.cawley@wsj.com)

Tesco’s Easy Growth, Easy Profit ‘Are Over’ Neil Saunders, managing director of retail consultancy Conlumino, said in a note this morning that Tesco’s investments in improving its pricing and its customers’ shopping experience are a “necessary evil; the price of failing to accept a reduction in profit would simply be the continued deterioration of the business.” Still, Mr. Saunders said, a return to rising U.K. market share is by no means guaranteed. Tesco, he said, “remains a profitable and successful business but in our view the days [of] easy growth and easy profit are now firmly over.” (john.edwards@wsj.com; @johnjedwards3)

Market Talk is a stream of real-time news and market analysis that’s available on Dow Jones Newswires

Tesco is still the U.K.’s biggest retailer by sales but has faced years of falling market share amid intense competition from higher-end grocery stores and aggressive discounters.

“We still have much to do but are making good progress in developing our plans to improve the long-term positioning of the group,” Mr. Lewis said.

Mr. Lewis added that the company would share more details about the measures it is taking to improve the competitiveness of its U.K. business on Jan. 8.